Cross-Eyeing: EUR/GBP – Close Trade

The Sterling continued to take a pounding this week as EUR/GBP opened up rallying to .8100 and above. My short trade was triggered and quickly found resistance around .8150, holding the British Pound sell off at bay for now.

While my trade idea was mostly based on technical reasons, I feel the fundamentals are going to win this one out. The UK government has made efforts to help the housing market recover, but it appears traders see recession as a real possibility and continue to price in rate cuts into the Sterling. The BOE does have an interest rate decision this week, and while it is widely expected they will hold, the MPC has surprised the market a time or two in recent years. I’d rather not guess whether they will hold or cut, so I’ve decided to close my position out for a small loss.

Trade Closed at market (.8134)

Total: -34 pips/ -0.34%

If price action can be sustained above .8100, we may be seeing a breakout and a new leg higher for the pair in favor for the Euro. We’ll just have to wait and see.

Trade Idea: 2008-08-28 13:19

Here’s another chart idea on EUB/GBP. While I took a hit on surprise volatility the last time, I’m not going to be shaken out and miss a possible opportunity.

I have a daily chart up with horizontal lines drawn to market minor and major support/resistance levels. As we can see, the pair is now heading up to major resistance at .8100 where the pair stopped, reversed, and fell all the way back to .7800. Will it do it again? I don’t know and I’m not going to try to predict if it will or not, but I do know that traders will be watching that area once again.

What’s happening with the pair fundamentally? Basically, the doom and gloom of the UK economy, more importantly housing sector, is getting price in while ECB jawbones that they will stay vigilant on inflation, thus negating the idea of Eurozone rate cuts. Sooner or later, UK weakness will be priced in fully and possibly overdone, while the Eurozone will have to shift it’s focus to economic growth as Eurozone data begins to show weakness now. Also, as commodity prices pull back, inflation pressures should give the ECB a little bit of breathing room. Whether this all plays out we’ll just have to wait and see, but my guess is that at .8100 the Euro may be overvalued against the Sterling once again. Of course, if I am completely wrong, I’ll have my stop to protect me. 🙂 Here’s what I’m going to do:

Short EUR/GBP at .8100, stop at .8200, pt1 at .8000, pt2 at .7850

Remember to never risk more than 1% of a trading account on any single trade. For those who have never demo traded EUR/GBP before, that value per pip is almost double that of EUR/USD. Adjust position sizes to stay within risk perameters.

So, if this trade triggers, I look to hold onto it for quite some time. That’s okay as the interest differential favors my short position. Stay tuned!

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